Micro Thesis - Distribution Growth

We invest in partnerships whose fundamentals will be an impetus for future distribution growth. Growth in distributions is a hedge against inflation - it preserves the purchasing power of our investment over the long-term. Strong growth also often results in underlying capital appreciation.

Total returns are estimated by adding current yield and distribution growth rates. The Yorkville MLP Universe currently has a yield of 5.8% and year-over-year distribution growth of 5.6% for an implied forward total return of 11.4%.

 

Current
Income

+

Growth of Income

+

Price Appreciation

=

Total
Return

 

 

Macro Thesis - U.S. Energy Revolution

In 2013, the U.S. became the world’s largest energy producer. In 2013, the U.S produced approximately 25 million barrels of oil equivalent per day. This represents an increase of nearly 40% from 2008.

 

Unconventional shale plays in new energy frontiers like North Dakota are driving U.S. energy production growth. Many of these regions were not on the energy map five years ago. It will require a tremendous investment in essential U.S. energy infrastructure to transport this new production to end users. Yorkville forecasts that an investment of $400-$800 billion will be required to bring these new energy frontiers onto the U.S. energy highway.

 

Characteristics

High Current Income

MLPs with a current yield of 5.8% offer attractive current income relative to other equity income alternatives.

Growth of Distributions

Strong and consistent distribution growth is the cornerstone of the MLP investment thesis. This growth provides a hedge against inflation and rising interest rates. MLPs have historically grown their distributions at an annualized rate of 5.6%.

Hard Assets

MLPs own and operate hard assets used for the transportation of energy from wellhead to end user. These tangible hard assets produce stable and growing cash flows.

Low Correlation

MLPs have historically exhibited low correlations to nearly all other asset classes including other equities, fixed income and commodities. From 2000 to 2013, MLPs had a weak correlation of 0.43 to the S&P 500. Similarly, MLPs have historically had low correlations to income alternatives such as REITs (0.35) and Utilities (0.43), as well as high yield (0.59) and the 10-year treasury yield (0.31). MLPs have also historically had a low correlation to both Oil (0.28) and Natural Gas (0.14). In short, MLPs when added to a portfolio increase diversification, lower the risk profile, and enhance returns greatly pushing out the efficient frontier.

Strong Total Returns

MLPs have consistently outperformed broader equity markets. Yorkville’s MLP Universe index has outperformed the S&P 500 in 10 of the past thirteen years. The outperformance is consistent across economic, interest rate, and commodity price cycles. The index has delivered annualized total returns of 18.1% since 2000 versus 3.6% for the S&P 500 generating positive annual alpha of 14.5%.